If a taxpayer owes $400 in tax and qualifies for an American Opportunity Tax Credit of $2,500, what is the expected refund?

To determine the expected refund, it's important to first understand how the American Opportunity Tax Credit (AOTC) works. The AOTC is a partially refundable tax credit available to eligible students and their families for qualified education expenses. It allows taxpayers to claim a credit of up to $2,500 per eligible student.

In this scenario, the taxpayer owes $400 in tax. The AOTC can be used to offset this tax liability. When the taxpayer applies the $2,500 AOTC against their owed tax, they effectively reduce their tax liability to $0.

Since the AOTC is partially refundable, that means if the credit surpasses the actual tax owed, the taxpayer can receive a portion of the credit back as a refund. Specifically, up to 40% of the AOTC, or $1,000, is refundable. Thus, with a $2,500 credit, after reducing the $400 tax liability to $0, the taxpayer can receive the refundable portion.

The calculation for the refund then becomes $1,000, which is the refundable part of the AOTC. Therefore, the expected refund from the tax scenario presented would indeed be $1,000, making this the correct answer